Lord Turnbull: My Lords, let me return to the report on the Finance Bill by the Economic Affairs Sub-Committee, of which I was a member. That highlighted a number of general concerns about the way in which the tax system is developing that go beyond the specific measures on the taxation of savings. I will focus on the following themes: complexity; destination; compliance; and communication.
I first started working on tax in the Treasury in 1971. In theory, the system worked by adding up all the sources of income, deducting an allowance and then applying a series of rate bands. This rather simple system reached its apotheosis in the late 1980s, when the noble Lord, Lord Lawson, was Chancellor of the Exchequer. Since then, the system has grown progressively more complicated, with a proliferation of separate regimes for different sources of income, each with their own allowances and rate bands.
I start with dividends. We must first acknowledge and welcome an important area of simplification. For the last 44 years, since the Labour Government’s classic corporation tax system was abandoned, part of the tax imposed at the company level has served as a credit or offset for tax at the personal level. I must confess that, despite working on this system and being a taxpayer myself, I never succeeded in mastering this. We should welcome the end of the tax credit and welcome the payment of dividends gross, with the personal tax collected as part of personal tax returns. But instead of just adding dividend income into other sources of income, it will now have its own £5,000 allowance, with a separate set of rate bands: 7.5%, 32.5% and 38.1%. I have not the faintest idea why those numbers were chosen or how they relate to the other numbers in the system.
The same process of fragmentation can be seen in the new regime for the taxation of interest. Again, there are benefits, particularly for the majority of people who earn small amounts of interest—these days, you certainly do earn a small amount of interest—but for the minority who pay the majority of tax things are rather different. Again, there is a separate regime—a £1,000 allowance, which is reduced to £500 for higher-rate taxpayers and abolished altogether for top-rate taxpayers—but this system, as the noble Lord, Lord Hollis, pointed out, does not currently apply to a number of important interest sources, such as bond and collective investments, but only to banks and building societies.
Then there is the growing use of another device by restricting the allowance as income rises—for example, to limit the benefit to higher-rate taxpayers of child benefit or to confine the benefit to basic rate taxpayers. The downside of this device is that cliff edges are created, as well as exceptionally high marginal rates. A further complication is that, having introduced the principle of separate taxation—albeit with some transferability of allowances between spouses—the Revenue has introduced a household basis of assessment  for operating child benefit and clawing it back. How HMRC distinguishes between the household that created a child and the household that might now be looking after it, I have no idea. There are also separate regimes for capital gains, with their own allowances and rates.
While this proliferation of treatments is growing, HMRC is pursuing a different agenda: giving individuals their own digital tax accounts. Much of the information in such accounts is to be provided by third parties, such as employers, companies or banks. The aim is for the taxpayer to be able to manage their own accounts. But the bottom line is that the individual still has to sign off the account as complete and accurate and be accountable for any errors. This gets more difficult the more complex the system is. The result is that HMRC will save itself a great deal of money, but anyone in the higher-rate bands or with a range of income sources is forced to incur the cost of professional advisers to get the figures right.
Therefore, it is essential that, as well as pursuing greater simplification, HMRC consults fully with taxpayers and communicates the details of the various schemes. In the two proposals that we looked at for the taxation of savings, the level of communication was inadequate. HMRC was lazy, in my view, and relied heavily on companies and banks to explain the changes in dividends and interest. In my view, this is not good enough. It has a responsibility to ensure that people can actually comply.
Finally, there is the question of where all this is going. Twice a year now, the Chancellor of the Exchequer makes a Statement to Parliament. These have become occasions on which to add a few more piecemeal measures. What is missing is any sense of an underlying philosophy, of a destination and a route map to it. Nowhere is this more apparent than in the taxation of pensions, where a decade ago a regime of caps was introduced. That had a logic to it—to limit tax relief for the higher paid—but it has been progressively whittled down to the point where it now barely exists.
For many years the dominant model was known to the cognoscenti as EET: contributions were exempt from tax; the accrual was exempt; but you paid the tax when you withdrew. We seem to be moving progressively towards what might be called TEE: you pay pension contributions out of taxed income; it accrues without tax; and when you withdraw it, you do not pay tax. At present we are stuck in a no man’s land, with features of both systems, such as ISAs and the lifetime ISA. We wondered whether LISAs were a Trojan horse for a full-scale move towards the TEE system. That would be jolly nice for the Chancellor, who would get his tax receipts up front, but precarious for the rest of us, who will have to assume that when we make the withdrawals one or two decades hence he will keep his side of the bargain.
Over the years, a number of studies have been made into the optimal shape of the tax system, by eminent people such as Professor James Meade and Professor James Mirrlees. The noble Baroness, Lady Altmann, has championed a much simpler pensions regime with payment by government to match the contributions made by a taxpayer. This has the merit of being simple, providing the right incentives and being fair to all taxpayers.
It would be a bit much to expect the Chancellor of the Exchequer to come up with the answer to all this by the time of his Autumn Statement on 23 November, but by the time of the Budget we can reasonably expect not further complication but further clarification.
On simplification, I, too, welcome putting the Office of Tax Simplification on a statutory basis but the benefit would be limited if it was there only to clear up the mess. It is important that it gets drawn into the policy formulation phase. I am confident that all these issues about budget secrecy and so on can be properly handled.
Finally, I will make a brief comment on fiscal policy in general. I welcome the abandonment of the idea of a surplus by 2020, but we are told by the Prime Minister that this is simply a matter of timing. The objective of achieving a surplus is retained; we are just to do it at a later date. I do not see the logic of this when such a huge range of infrastructure requirements are unmet in this country. I do not see that it is necessarily wrong to have a deficit, provided that it is small enough that the GDP to debt ratio continues to decline.